US corporate debt refinancing

Investment Analysis Clubs Macro Economic Trends and Risks
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It’s going to be expensive rolling over that debt:

Non-financial S&P 500 companies have $107.7 billion in debt maturing next year, with an average interest rate of 2.8%, according to Calcbench. Refinancing at a higher rate of 5.44%, like the one-year Treasury bill rate in early November, would add $3.09 billion in interest expenses.

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If it only adds $3B then they will be okay. That’s because they pay over $200B in interest each year. This is essentially a non-issue in the aggregate.

The real issue is debt that CANNOT be rolled over, a few smaller companies have debt that while it can be serviced at the lower rates, it cannot be serviced at the higher rates, and nobody will roll that over for them. They are commonly called “zombie” companies. The other part of this real issue is debt that is backed by assets that have dropped in value (the “CRE problem”) and those can’t be refinanced at face value. The lender, usually a medium sized bank, but sometimes other entities as well, doesn’t have many good choices at that point:

  • They can take a sizable haircut. For example, refi a $100M loan into a $75M loan and either forgives the remaining $25M or takes an equity stake for the $25M.
  • They can foreclose and take ownership of the property (or the company). But banks usually don’t manage property (or run companies) and can’t count that property/company as easy capital to make other loans against (the core of their business). So the banks want to get the thing off their balance sheet as soon as possible. And haste tends to lower prices, so the banks are very motivated sellers and will sell at lower than expected prices.
  • They can keep things rolling by modifying the terms of the existing loans. For example, extending terms to avoid maturity until either rates come down or government steps in with some sort of bailout program.

If the banks truly believe that rates will come down soon, they might opt for the last option in the above list in many cases. They really want to avoid option 2 en masse. That doesn’t mean that individual banks, or other lending entities, here and there, won’t take possession of some prize properties/companies. Especially other lending entities, sometimes they exist in part for the chance of swiping the property/company when the current owner can’t pay anymore and can’t refinance in a timely manner.

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We’ve talked before about the zomby companies. They don’t have the resources to refinance at higher interest rates and will likely fail.

Not a good time to own junk bonds!! Look out below!!